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Why Office Depot Stock Soared 26% in November

The struggling office supply chain may survive after all.

What happened

Shares of Office Depot(NASDAQ:ODP) jumped 26.2% last month, according to data provided by S&P Global Market Intelligence. The office supply retailer reported better-than-expected earnings results in early November that left investors feeling more optimistic about the company's turnaround efforts.

So what

The company reported sales growth of 10% year over year. Non-GAAP earnings per share were $0.13, which beat analyst estimates by $0.01. The top line mainly benefited from the acquisition of CompuCom in 2017, which management acquired to beef up its business solutions division. Revenue from business solutions, which includes e-commerce sales, grew 1% year over year (excluding acquisitions).

The company also continues to generate positive free cash flow. Through the first three quarters of the year, free cash flow was $434 million, up from $316 million in 2017. This was higher than management's original guidance for free cash flow at the start of the year.

IMAGE SOURCE: OFFICE DEPOT.

The only negative in the quarter was continued weak performance in Office Depot's retail stores, which has been hit hard in recent years by the growth of Amazon.com and other formidable e-commerce players. Retail sales were down 6%, mainly due to a lower store count as management continues to close underperforming stores to improve profitability.

Now what

Office Depot is placing all of its bets on growing its business solutions segment, including IT support and supplies sold to small and medium-sized businesses. Business services now make up 60% of total revenue. The company is also building out technology for its omnichannel strategy.

Based on improving sales trends, management raised its full-year outlook for 2018, which calls for sales to grow about 7% to $11 billion. The consensus analyst estimate expects the company to report adjusted earnings of $0.34 per share, down from $0.45 per share in 2017. But management expects to generate free cash flow of about $450 million compared to $326 million last year.

What likely got investors most excited was the positive outlook management offered for next year. Management's early 2019 guidance calls for growth in revenue of less than 1% and growth in adjusted operating income. This doesn't sound like much, but it's major progress for a retail store that many thought wasn't going to make it.

CEO Gerry Smith said, "Overall, we are making great progress on our transformation and remain confident that we have the right strategy in place to drive sustainable, profitable growth in the future."